C$ becomes G10 laggard, falling 6 pct after September rate rise

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By Fergal Smith

TORONTO, Oct 27 (Reuters) - The Canadian dollar has been the weakest performer of the G10 currencies in the seven weeks since the Bank of Canada last raised interest rates, and some strategists predict more declines in value after the central bank on Wednesday dialed back expectations for more interest rate increases this year.

Most major currencies have lost ground against the U.S. dollar in recent months as bets of a December Federal Reserve rate rise increased. But the nearly 6 percent slide in the loonie since Sept. 7, when the central bank last hiked rates, is the biggest drop among the G10 currencies over that period.

Currency strategist say the loonie could slip further after the Bank of Canada said the currency’s strength is delaying the return of inflation to its target and holding back exports.

“The odds are skewed toward a weaker currency at this point forward,” said Mark Chandler, head of Canadian fixed income and currency strategy at RBC Capital Markets. “Chances of us getting back to C$1.21 and close to it are pretty limited.”

The loonie posted a more than two-year high near at C$1.2063 to the greenback, or 82.90 U.S. cents, in September as expectations for additional rate hikes prompted investors to build bullish bets on the currency to their highest in five years. Those positions may now become unprofitable.

Perceived chances of another hike by the end of the year have fallen to 25 percent from nearly 100 percent before a speech last month by Governor Stephen Poloz, which signaled the central bank had become more concerned about the currency.

That reduction in rate hike expectations has led to a loss of the yield advantage that the Canadian dollar had over its U.S. counterpart since September.

The two-year spread, which peaked in September at 25 basis points, has slumped to -17 basis points.

That unfavorable gap in yields helped push the loonie to a three-month low of C$1.2916 on Friday, taking it full circle to where it was before the Bank of Canada hiked in July for the first time in nearly seven years.

“A smoother path and a bit more communication (from the Bank of Canada) may have avoided some of the unwanted volatility in the Canadian dollar,” said Shaun Osborne, chief currency strategist at Scotiabank. (Reporting by Fergal Smith; Editing by Steve Orlofsky)